The Dark Side of the Brokerage Business: Nithin Kamath’s Warning on Concentration Risk

Nithin Kamath, the co-founder and chief executive officer (CEO) of discount broking firm Zerodha, recently highlighted the risks of running a broking business, which often appears attractive on the surface — fast-growing revenues, rising trader numbers, and increasing volumes.

The 45-year-old entrepreneur warned the broking business faces massive concentration risk—where a single change can wipe out a big chunk of revenue. ‘I wonder why the brokerage business looks so sexy from the outside,’ he quipped.

Hidden Risks Behind ‘Sexy’ Brokerage Business

In a social media post on June 20, Nithin Kamath shared an anecdote wherein he said that back in 2008, a private equity veteran decided against investing in a broking firm due to a glaring issue: revenue was highly concentrated among just a handful of clients.

This concentration risk was a major red flag, signaling vulnerability to client attrition or market shifts.

‘As I’ve mentioned numerous times, a small number of active traders contribute to most of the exchange turnover. This was a lot worse back then. Fast forward to today, it’s still concentrated, but in a different way,’ Kamath’s post read.

One might wonder that with the active clients on NSE rising steadily (to 49.2 million in fiscal 2025), these risks must be dissipating, but Kamath claims the situation remains largely similar.

‘While the number of traders has gone up, but for both exchanges and brokers, the bulk of revenue now comes from just two contracts: Nifty and Sensex F&O. For us, it’s over 80%, and it’s similar for other brokers as well,’ Kamath said.

This means any regulatory change, market disruption, or shift in trading behaviour affecting these contracts could wipe out a substantial portion of brokerage income overnight. Kamath, however, wonders if this risk is factored in when brokerage businesses are valued.

Indian Regulatory Environment: A Unique Challenge

Adding to these risks is the unique Indian regulatory environment, which differs starkly from global markets, as highlighted by Kamath.

India does not permit payment for order flow, a practice common in the US that can provide additional revenue streams for brokers. The prohibition limits brokerage firms’ ability to diversify revenue sources. Additionally, the quarterly fund settlement mandate — requiring brokers to return all client funds to their bank accounts every quarter — imposes cash flow constraints and operational challenges, akin to a forced ‘bank run’ scenario.

There is also no significant exposure to emerging asset classes such as cryptocurrency, which in other markets offers new growth avenues.

Nithin Kamath’s Concerns

Against this backdrop, Kamath wonders what makes the broking business look ‘so sexy from the outside’. ‘I think people forget that the brokerage business is a highly leveraged business, and any disruption can wipe out a significant portion of the revenue,’ he said in an interview.

He emphasized that while the brokerage industry has grown significantly over the years, the risks involved are often overlooked. ‘I think people are getting complacent, and they’re forgetting that the business is still very leveraged,’ Kamath added.